2004 Winter Conference Keynote Address

Dr. Richard W. Judy
Slides (PDF)

Introduction

The loss of domestic jobs as a result of outsourcing in manufacturing and services, mainly to emerging countries like China and India, is a big concern both in the US and in Europe. A CNN poll asked who believed Alan Greenspan’s recent claim that new jobs will replace old jobs, as they always have. Not less than 89 percent of people responding said they did not believe Mr. Greenspan was right. That reflects serious concern.

Yesterday in The Wall Street Journal, a professor of Economics at Dartmouth wrote a much more positive article on the effects of outsourcing of jobs.

Today we have a great authority here who will share his thoughts on what impact offshoring will have on the US economy. Dr. Richard Judy directs many studies integrating economic development and workforce development at levels ranging from global to local. Dr. Judy has assisted numerous workforce investment boards in planning and board member orientation. His previous work has included project directorships for studies of economic reform in many countries including Hungary, the Ukraine, Russia and the Baltic states.

Currently Dr. Judy is chairman and CEO of Workforce Associates, Inc., a private consulting firm. He has worked with over 50 organizations worldwide, including the US Chamber of Commerce, GE, the National Association of Manufacturers and the World Bank. Dr. Judy is co-author of the books Workforce 2020 and Mechanical Engineering of the 21st Century.

Richard W. Judy, Ph.D.

The topic for today is not just one of the next big things; it's already a big thing. Every now and then, something comes along in the sphere of economic affairs that really makes a big and transforming difference, and I am convinced that offshore outsourcing falls into that category.

My plan for this session is that we are going to talk a bit about the W's – what, why, who and where. We will go on from there to some projections on the growth of “offshoring,” a new word that has recently crept into the lexicon.

Then we will talk about potential limits to the growth of this phenomenon – what may retard it or possibly even reverse it at some point. Then we will go ahead with the meat of our presentation today, the impacts on the economy overall – the sort of things that Chairman Greenspan was referring to. In the long run, by the way, I think he is probably right about the economy-wide impacts. We will talk about the distribution impacts, meaning the short- and medium-term impacts of this phenomenon: who wins, who loses. Finally, we are going to take a special digression, although because to you it is of central concern, it’s really not a digression: we’ll look into the impacts on what I would call the office-intensive industries.

Setting the stage, there are three things that are most important in driving change in the world today, any one of which we could talk about all day long.

One is demographics. Peter Drucker has written that the dominant factor in the next two decades won't be economics or technology, it will be demographics. The nub of the matter is that the increases in the world's working-age population are going to occur in Asia and, to a lesser extent, in Latin America. There will also be growth in sub-Saharan Africa, but it is another matter from the labor-force growth in Asia. The European Union actually is going to experience a diminution in the working-age population over this decade and halfway into the next. The NAFTA countries (the US, Canada and Mexico) show positive, but not particularly impressive growth when it is juxtaposed with the East Asian or the South Asian countries.

The combination of demographics and technology is driving the phenomenon we are here to talk about today. Technology, and particularly communications technology – the Internet, very high-speed bandwidth and now Internet telephony (telephones over the Internet), are going to transform the world rapidly and make it possible to perform anything related to information, practically any place in the world.

The third force driving change is the development of economic and political institutions. The kind of thing we're talking about now wouldn't be happening, or at least not at its current pace, were it not for changes like Deng Xiaoping’s opening of China to world trade. China’s entrance into the world market is of phenomenal importance, as we all know by now. Concurrently, the World Trade Organization has liberalized many trade barriers and will continue to do so. I would be remiss if I didn't also mention the economic and political transformations occurring, perhaps more gradually, in India. There is an erosion of the bureaucratic system that has so long retarded growth in that country and in the information technology (IT) and other industries there, we see fantastic changes occurring very rapidly.

What exactly are outsourcing and offshoring? Outsourcing means an arrangement whereby one company provides goods or services to another, where those goods or services could be, or used to be, or usually were, provided in-house.

The motivations, of course, are to achieve lower cost, sometimes to achieve superior performance, and sometimes to focus on core competencies (which companies increasingly define as brand management and design of products and services). Finally, in some cases outsourcers are forced to outsource because the competition is already doing it.

I think those of you in Europe may want to think about this. Outsourcing, indeed, offshoring, is not as important in Europe as it is in the US and Britain, but it will be. The reason is not that you want it to be, but because your global competition will be doing it and you will have no choice. So that factor, the driving force of competition, is exceptionally important.

Offshoring, of course, is just a special case of outsourcing – one in which outsourcing is done in a country other than your own. Why use offshore resources? Well, a classic motivation is to be closer to offshore customers. It is marketing driven. For decades, maybe centuries, companies have relocated their activities to other countries in order to be closer to the markets. That is a classic reason, but it’s not really what's behind the activity we're seeing here today.

Cost savings are behind today’s activity. McKinsey & Co., which has studied offshoring, has said that a dollar spent overseas gains the offshoring company 58 cents in net cost reductions. In other circumstances the savings or the advantages may differ, but that gives you some idea. Alternatively, it is said that you could hire a good mechanical engineer in India for $15,000 a year, but in the US you’d pay $65,000 for that. These comparisons give you some ideas of the relative scale.

Sometimes superior performance is a factor. It is not always true that the quality of work done in services or production is better in the developed world than in the developing world. The press is full of this phenomenon. This Monday’s Wall Street Journal ran a story titled “Migration of Skilled Jobs Abroad Unsettles Global Economy.” And The Financial Times has had a series as well. Who is thinking about or will be thinking about offshoring? Well, generally everybody – every company in every competitive private industry where labor costs are a substantial share of domestic production costs. I want to emphasize the “competitive private industry” part of that statement. The laggards will be the public sector and those closely tied to it and influenced by populist pressures of one kind or another. Such pressures will tend to retard the use of offshoring. But competitive private entities in industries where labor costs are a significant percent of domestic production costs are going to be thinking about it either now or soon, as will their domestic suppliers. Companies supplied by entities that are not offshoring when they could are going to be under pressure to do so.

Let’s look at who offshores and why. I’ll give you a few examples. The first is the information technology industry, where many companies are doing it. IBM, Cisco, Microsoft, all the majors are into it, and that's a process that will probably continue with some give and take. We'll talk about Dell's experience with its call centers shortly. But information technology companies have been on the first wave of this phenomenon and they will be out there until hell freezes over.

Financial institutions, I suspect, would be of particular concern to many of you. Lloyd's, Prudential, American Express and others are in India and some of them are other places as well. So financial institutions are coming along, you might say, in the second wave.

The next group would be research and development (“R&D”), one of the more recent phenomena. I think General Electric is the quintessential case. I’m sure some of you are familiar with the GE Labs in Schenectady, New York. It's a very, very impressive factory for the production of intellectual property. I was speaking there two or three years ago. My audience was 350 Ph.D.s, engineers and people involved in high-tech, serving all of GE's major business sectors from medical imagery and jet engines to refrigerators and financial services. During the course of my talk, I noticed that half or more were Asian professionals, recruited by GE to work there.

At lunch I remarked on this and they said I hadn’t seen anything yet. They were in the process of establishing what is now known as the John Welsh Labs in Bangalore, where they would replicate every one of the major labs in Schenectady. So now GE has this major R&D design center in Bangalore, India. It is staffed primarily by Indians, but also Chinese, other Orientals, and a few Occidentals. It's an amazing, amazing phenomenon and very productive I'm told by the people at General Electric.

Where is the offshored work going? It’s going mainly to low-wage countries. I won't say exclusively to low-wage countries, because somebody probably could come up with a counter example, but mainly low wage countries, the familiar ones: India, China, Mexico, Russia and Eastern Europe.

India and China present a most interesting case because they are so populous. For many, many years, India was criticized by economic development professionals everywhere as concentrating too much on post-secondary education – engineering, technology and so on – and not enough on primary education. The criticism was that there was too much illiteracy among the masses, too much misallocation of resources. But now the worm has turned, in a sense. They are turning out, and have been for years, very large numbers of very highly-qualified professionals in technology and related fields. That has redounded now to their credit in this phenomenon we're describing as offshoring. Since these professionals speak English they are at a great advantage. It is a very large, very young population. India has the youngest population among the major countries of the world and will continue so for quite a number of years.

China, of course, is huge. It has been the great outsourcing place for manufacturing and, to some extent, also for services. They're trying to replicate what the Indians are doing in information technology. Russia and Eastern Europe also have well-educated populations. Those of you in Europe know that there is a fair bit of outsourcing going there, both in the manufacturing and the service sectors.

Mexico’s population is not as well educated, by and large. It's not that an educated class doesn't exist; it is simply not such an enormous factor. But Mexico does have inexpensive labor and it’s close to the American market, so we have seen a great deal of outsourcing there. However, as many of you know, we now notice a movement of some manufacturing, particularly low-skilled, labor-intensive activity, from Mexico to the Pacific Rim area, particularly China.

Let's talk a little bit about the changing nature of outsourcing. Like many other things, outsourcing seems to be following an evolutionary path. The first stage of that evolution was driven by marketing, as I said earlier. That was the classic motivation. The stage involves activities to develop foreign markets and to serve foreign customers. It is straightforward: Caterpillar is in China because capital construction in China is a huge thing these days and they want to be there to sell their equipment. So they are manufacturing in China. We could go on and on with examples like that. It’s a familiar one and has been going on for a very, very long time – at least as far back as the 19th century. This country was made by relationships like that, in fact.

Stage two brought in some other elements. In manufacturing, low-skill, labor-intensive aspects were performed by outside sources. This began in the 1970s, accelerated in the 1980s, and really picked up speed in the 1990s, led by the information technology sector industries. It was particularly prevalent in the manufacture of computers and all of their assemblies. In fact, the ability to disaggregate the value chain is one of the criticalities in outsourcing. IBM led the way with the PC, introduced in 1981. Nothing in the PC was made by IBM – nothing! In fact, it was sort of a skunk-work operation at IBM. Many of the professionals thought it was just a minor play – that it wouldn't happen, so they took the attitude of letting the division have its fun with this little toy. The disk drive was made someplace else; the central processor was made by Intel; the operating system, as we know now, was made by Microsoft; and so on. So IBM disaggregated that value chain, assembled all this stuff, put the IBM name on it as a so-called original equipment manufacturer, and sold it that way.

That was the first really big example of value chain disaggregation in information technology. The automotive industry does this all the time. They have a whole tier of suppliers worldwide, as you know, that supplies them with components.

The next stage added more to the list of what was being outsourced. Up to this point, we’re talking about outsourcing in manufacturing; so far, we haven't talked about services or white-collar jobs. Now, if it is labor intensive, we have manufacturing being outsourced and offshored at all skills levels, not just the lower skill levels. That's what really gives the competitive edge there. There is more final assembly of final products.

One thing I’ve not mentioned is the entry of offshore companies into the picture. Japan has led the way, but there are also Korean operations and so on. Let me give an example. I bet quite a few of you are carrying Samsung cell phones around in your pockets. Motorola introduced this product and now finds itself under intense competition from offshore products. So now you have foreign-based companies competing; companies that have grown up, at least to a partial extent, as a consequence of offshoring.

In this stage, we begin to see the service sector coming on strong. This is mainly a 1990s phenomenon. Back-office clerical functions, paper transactions, data entry, etcetera, were the first, and of course call centers. Call centers have been set up in many parts of North America and Europe in order to provide jobs to people who have been displaced from manufacturing, or have otherwise found themselves, in the past five to seven years, under increasingly severe competition from Asia. Here again, India enjoys an advantage because of its citizens’ facility in English. Their English is sometimes very good indeed. There is a lot of concentrated language training now in European call centers to get their workers to be able to speak English in a way that is recognizable to somebody, for example, from Savannah, Georgia, and vice versa.

Increasingly at this stage, human resource functions are being transferred to overseas as well. That started in stage three and it's really picking up speed now.

In stage four in manufacturing, we add research and development. I just spoke of what's happened at GE. In other entities as well, design work is being done by engineers located offshore. The offshore resources are beginning to be used for activities higher up the food chain, so to speak. The trend that started off as low-skill, labor-intensive manufacturing activity is now coming very high up the food chain in manufacturing and in services as well. One area not on the chart is the pharmaceuticals. Pharmaceutical research and development is important, as is the testing of pharmaceutical products. Human testing can be done much less expensively offshore than it can in Europe or North America.

The trend in services is a particular concern to this group I think. All kinds of business processes are involved; it's a big grab area. I'm going to talk more about that. Finance and insurance increasingly are finding offshore production. There is legal work, such as patent research, now being offshored to Indian legal firms because they have the facility of reading English material and they can pore over the issues less expensively.

Finally, offshoring in medical diagnosis is coming fast. Radiology is probably the leading edge. I mean, think of it. How many radiologists ever see their patients anyway? Even if they're in the same city, they don't see their patients. They look at some image. It used to be a photographic or x-ray image; increasingly it's now a digital image, using tomography and similar technologies. The review can be done as well halfway around the world as it can downtown, so where you have radiologists who can work for a much lower cost than those in the US, it is going to be done increasingly in the lower-cost locale.

Looking ahead, I’ve brought a couple of projections. We should always take projections with a certain grain of sodium chloride, but these are interesting. Gartner, one of the respected consulting data groups in the information technology industry, has said they think that by this year 80 percent of executives will be thinking about offshoring, and 40 percent will be sourcing their IT work, one way or another, through a global delivery model. Either they will have their own captive providers abroad, typically in India, or they will be working with providers, outsourcing companies, that do. One way or the other, the prediction is that 40 percent of US firms will be sourcing at least some IT services through global delivery models.

Forester, another well known crystal-ball-gazing outfit, sees 3.3 million American jobs from the service sector offshore by 2015, up from 475,000 now. And among lawyers – this is good news [laughter] – 489,000 will be, I won't say displaced, but those jobs will be done abroad. That will be about 8 percent of the field. So, for what they’re worth, those are two fairly prominent sets of prognostications.

What may limit offshore outsourcing? It's not fated that all these things are going to happen at all and a number of things could delay the process. I’ll discuss a few of them and talk about how serious they might become and what this may mean for us.

The first potential limitation is costs. Sometimes the savings are exaggerated. A lot of firms out there are hyping offshoring, selling the services. They're marketing it and they sometimes exaggerate the savings to be had. There are costs involved. We don't have time to go into all the costing and how you need to think about the savings – and the additional costs – but sometimes companies find themselves spending more than they anticipated, maybe even more than they did back at home. So mis-estimation or misunderstanding of the costs is one factor.

The next potential limitation is customer relations. In much of the work that's done, being service work, the people factor is important. Your ability to interact with the people with whom you are dealing, whether it's a call center where people are calling in with questions or some other setting, is important. Last week I bought a new piece of gear from HP. It didn't work very well, so I called up technical support. I was thinking ahead about talking to you today and I asked a few extra questions of this young man. He was a young, very competent engineer, had a degree from an engineering university. He spoke good English, accented but very good. He understood me well and solved my problem just fine. That doesn't always happen.

Dell has offshored a great deal of its customer support call center work and now is bringing it back stateside. Apparently, there are a variety of reasons, but they didn't feel the job was being done as well as it should have been. A couple of British firms are doing the same thing. So that can happen. Indian firms that are on the ball will see this trend and begin to try to deal with it, but the customer relations angle is one potential limiting factor in some cases.

The next issue is teamwork problems, which relates to customer relations. For a software developer, for example, or a legal group, it may be difficult to effect the kind of teamwork you need if the members of the team are scattered all over the globe. Increasingly, our telecommunications capability makes it technologically possible for them to work together while scattered, but it doesn't always work so well. So teamwork problems sometimes are going to be a factor limiting how effective offshoring, or any other kind of outsourcing, can be.

Cultural gaps, another related phenomenon, can also be a problem. Does the person on the other end of the line, whether it's the customer, the user or a team member, understand the cultural dimensions of those with whom they are dealing? Sometimes these variables can get in the way. Sometimes those things are problems, although they are probably transitory problems that can be resolved to some extent.

The next potential limitation is very likely more important: wars, political instability and terrorism, whether real or imagined. A year or so ago when India and Pakistan – both nuclear armed – looked like they might be on the brink of some serious conflict, there was a good deal of fluttering in the dovecote among those who had already outsourced. They were worried about the security of their operations abroad. Certainly those kinds of disruptions are a possibility.

Backlash is something we see right now. The articles that I recommended to you from yesterday's Financial Times and Monday's Wall Street Journal are really about backlash. Anti-globalization and protectionist sentiment not only are possible, they exist and they're going to build. There's no doubt about that. To what extent they will build remains to be seen. These forces will take advantage of events like wars, political instability and terrorism. You’re certainly seeing that in Europe, and in the US we are seeing it in some places as well. New Jersey, for example, had proposed to outsource a major IT job to India. There was a political backlash against it, to the extent that the state cancelled the contract. The savings would have been about $150,000 because the cost with the offshore provider was so much under the domestic cost. Indiana, my state, had a similar event recently.

Exchange rate risk can also limit offshore outsourcing. We all know what has happened to the euro and the dollar of late. We wonder how long the Chinese currency can remain pegged to the dollar. How long will it be before the Chinese tire of buying US government securities, paper that doesn't pay much? They do it, as the Japanese do, in massive quantities in order to maintain fairly low exchange rates for their currencies. I don't think that's sustainable. One of Alan Greenspan’s predecessors as chairman of the Federal Reserve once said that those things that are not sustainable have a way of coming to an end [laughter]. In the US the simultaneous existence of very large budget and current account deficits cannot continue indefinitely either. I think here the change is going to be evident sooner rather than later.

Rising wage and other costs in host nations are also concerns. They will be a factor, although a long-run factor. The supply of engineers in India or in China is so great that it will be some time before the compensation levels of professionals there are driven to European or North American levels. It'll happen eventually if things continue along this line. Prosperity will spread, but we are talking now about the middle of the century, not about next year. So costs in host nations will rise, but it won't happen any time very soon.

Let's now turn to the impacts on the US economy, the reason you came today. We want to look at who the winners are. The direct winners, of course, will be companies that manage to lever offshoring to enhance their own competitiveness, particularly where labor costs are a high percent of total domestic costs, or when offshore providers offer better quality. Customers and shareholders in those companies will also gain in the short run.

Indirect winners will be everybody, really. This is the Greenspan point, the classic economics view according to Ricardo. We're all going to be better off because of the international division of labor, everybody specializing in those things that they can do best, and so on. This will happen, but only in the long run and, as Lord Keynes once said, “in the long run, we're all dead.” Nevertheless, everybody will benefit from this process because of greater efficiency and higher productivity. It will mean greater value and so on. Even today, many people benefit from this but don't understand the benefits and their source. Consumers may look at the back of the label on goods and realize where they’re made, but it isn't always the case when you're using a service that you understand that it came from someplace on the other side of the globe.

Those who will lose in this equation certainly include companies who fail to leverage offshoring for their own competitive advantage, particularly if their competitors do so. Also affected will be the workers and suppliers of these companies. So the losers, generically speaking, are going to be companies who fail to offshore but whose competitors do. That lies behind my remark about the Europeans being eventually forced into offshoring.

One group of losers that may be close to home is indicated in a Doonesbury comic strip about offshoring that I’ve included in the charts. I thought you might appreciate that particular one.

Let's now take a look at the implications for the US workforce. White-collar workers in the service industries are now feeling the heat that has long been felt in manufacturing, which has been under the gun of outsourcing and offshoring for several decades. Some jobs are gone or will go. Another implication is that the premium now paid to some well-educated and highly-skilled workers won't be there. Those engineers, for example, or software gurus in direct competition with their Indian or other counterparts will find the premiums that they have enjoyed under threat.

Another implication involves what I think of as the shelf life. The duration of the usefulness of old degrees, certifications and skill sets will shorten dramatically. That is for sure, because this whole process accelerates our pace of change and that means the obsolescence rate of old qualifications picks up speed.

The advantage will pass to entrepreneurs of all kinds. By this I mean people with entrepreneurial spirit – who can put together combinations and new forms – and to others who quickly learn and adapt to changing circumstances and opportunities and to threats as well. I think those are some major implications for the US workforce.

Carly Fiorina, the CEO of Hewlett Packard said there is no job that is America's God-given right anymore; that we have to compete for jobs. I think nothing could be more true. She sees it and it's true.

Let's look at the impacts on some specific locations in this country and on some specific industries. I’ll just show a few locations, although we have done this analysis for many US markets. Take a look at employment in eight major metropolitan areas in selected industries. I have information today for New York City, San Francisco, San Jose, Los Angeles, Boston, Chicago, Jersey City, Denver and Miami.

Broadly described, the industrial sectors we are looking at are the information sector, the financial activity sector and professional and business services. We are going to look at what's been happening recently and at our expectations of what may happen in the near future in these industries. I want to give you more detailed definitions for these three broad industries so that you know what we're talking about. In the information sector I mean publishing, motion pictures, broadcasting and telecommunications. We are going to be looking at employment in all of these industries. The next one is financial activities, where really there are two major sub sectors: finance and insurance, and real estate and rental leasing. The third major area is professional and business services, which includes all professional, scientific and technical services. The fine print in the chart will tell you what it's all about there, but it's really just what it says - professional, scientific and technical services. It also includes management of companies and industries – the kinds of things that have been done in big headquarter cities like New York, London, Frankfurt and other places. This includes not just financial services but management services of other companies. Finally there are administrative and support services, various kinds of office administration, things of that sort.

All of these are office-intensive types of occupations and we are going to now take a look at what's been happening in them in several of these metro areas, starting with New York. These employment charts show total employment in the sectors as I just defined them. They start in 1990 and go through November, 2003, using monthly data from the Bureau of Labor Statistics.

Between 1990 and late 2003, in the metropolitan New York market, total employment in the financial services sector has been edging downward. It's not something that happened overnight, it's been edging downward. It stabilized in the boom years of the late 1990s. Then you can see the sharp break there after September 11, 2001, followed by a continued slow loss of jobs in the financial activities sector.

Now let's take a look at the information sector. Employment there was declining in the mid-1990s. Then, as the internet boom bubbled up, we see a big surge of employment in the late 1990s, really up to 2000. But it was beginning to decline already before September 11, because the recession that began in 2001 predated the attack on the World Trade Center. Then there was continued erosion, with maybe some recent stabilization. So it's a mixed picture there.

Now let me move on to professional and business services. You may or may not have noticed that the calibration on the left varies from chart to chart. In this case, we are looking at something on the order of 475,000 people employed in the business and professional services in 1990 here in New York City. That declined during the recession of the early 1990s and then began an upward movement that continued really right up until 2001. Now we've seen a very substantial decline from that. That decline occurred in the recession that began in 2001, which statistically is over with by this time. It was no steeper than the one that occurred in the early 1990s. But it does suggest that we are not likely to see rapid recovery even under the best of circumstances. And to the extent that that decline is due to offshoring, the recovery may not be anything like what it was in the 1990s.

I included a chart on employment in manufacturing not because it is office-intensive but because I think we need to understand what's happened out there in the manufacturing sector. I can put up a chart like this for almost every community in this country – there are very few exceptions – and this is what it would look like. (By the way, all this jiggling around is because these are monthly data, so you see the month-to-month variations and the seasonality of employment. But we're really looking at the trends.) The trends definitely are downward. Over this period of time it’s really just been constant. There hasn't been a particular acceleration except in percentage terms, because the absolute drops have been very similar. So that's what has happened in manufacturing.

Now, let's take a look at the aggregate of these office-intensive sectors. The chart stacks the employment levels in each of the industry areas so we see what the totality looks like. (This doesn’t include manufacturing, just the office-intensive industries.)

We see business and professional services rising from above 430,000 in 1990 up to around 600,000 before the declines of 2001, a very substantial increase. Then there is a decline to something on the order of 470,000-550,000. I think that’s about where it is now. Once again that decline, although it’s significant and obviously it has something to do with the vacancy rates here in the city, is no more significant, particularly in percentage terms, than the decline back in the 1990s. We have had this secular rise in business and professional services, but that's an area very, very vulnerable to offshoring of these white-collar jobs.

I have the same set of slides for every one of these metro areas I mentioned. Does anybody want to look at any particular city or sector?

Let's go over to San Francisco. The financial area was pretty stable; there was not much change in the 1990s; a little bit of growth and a bubble at the end of the period. Then there was a fall-off, followed by a plateau. So there hasn’t been a big change there.

Information technology is another matter. We're close to Silicon Valley here, so we see the “dot-com” bubble and everything attached to it in dramatic form. There was a huge expansion of employment, reaching its peak, of course, in 2001, and then a really sharp downward slide. This is an area very vulnerable to offshore competition in all its forms.

In professional business services, there was a nice rise during the second half of the 1990s, then a very sharp decline because there are relationships among these various sectors. Many of these professional and business services serve the information technology industry, whose sharp decline we just saw. So here, there’s also a very significant decline. They're essentially back where they started in 1990.

The manufacturing sector was also closely linked to information technology and suffered a big hit after 2001.

As we look now at all three office-intensive sectors stacked together we see San Francisco employing more people in these sectors than back in 1990, but the trend is not favorable. Notice that back in the recession of the 1990s there was no decline, in the totality or even in the three pieces. But now we are seeing a significant decline. This is an area that is really vulnerable to offshoring in various parts of its three office-intensive industries.

I think maybe we'll leave it at that. Some of these are very interesting. There is a lot of variation here among these cities and you may wish to look at them more closely. But unless there is a massive demand for it, I am going to go on. There is? Miami. Okay, back to Miami.

Curiously enough, there was a decline in the financial activity sector in Miami in the early 1990s. Then it’s just gone along, more or less the same, not showing any tendency to growth.

In information technology, there’s nothing like we saw in San Francisco or would see in San Jose. But there were significant increases in the second half of the 1990s and a fall-off since that time.

This next one, professional business services, is really important. There is a steady upward growth. We see no significant impact of the recession of 1991, no significant impact of 9/11, just steady growth and no slump in the early 1990s. That's a growth sector in Miami.

In manufacturing, well, it's an old story, the same as always.

In the composite of the office-intensive industries, we see very significant rises over time. I'm not saying they're immune in Miami to some of the things we're talking about on offshoring, but this is a bullish set of numbers and I would say the prognosis for the Miami area is not so bad.

Are there any other requests? Okay, here's Boston.

The financial activity sector declined sharply in the early 1990s, followed by a steady growth and then just a leveling off in the late 1990s. There’s been no big impact in recent years, maybe somewhat of a decline. This area is to some extent going to be associated with offshoring, but much of what goes on probably won't be the type of financial activities work done there. So it's not a strong trend one way or the other.

The Boston area is big in information technology. It slumped a bit in the early 1990s, grew later in the decade, participating in the big boom, and has had a more severe fall-off in this decade. We're really seeing the impact of offshoring because the information sector is very vulnerable to it.

The professional and business service sector is not dissimilar. Employment there shows a big fall-off following steady growth after the 1991 recession had passed. But in this sector employment is still well above where it was in 1990.

In manufacturing it’s the same old story.

Overall office-intensive employment in the Boston area is above where it was rather substantially, probably 100,000 more now than in 1990. It is downward sliding, but it may level off – it may even resume growth, but much of the area apparently is vulnerable to competition from other places.

In conclusion, I want to say a few things. The benefits to companies that do offshore, and to their customers, will be very impressive if they're going to do it well. That virtually guarantees the process will continue, irrespective of political backlash. Offshoring of both manufacturing and the service sector will accelerate, barring unforeseen disasters.

But we need to keep this in perspective. The total white-collar loss will be small compared with the millions of jobs that have been lost in manufacturing. Further, if it happens, it is going to happen much more slowly. We're not looking at this decade, we're looking well beyond. We're going to see jobs go, yes, but they will be replaced to some extent by feedback relationships. As China and India and other countries enjoy greater prosperity, particularly if the exchange rates move favorably for our exporters, we will find that our businesses have new and growing markets, very large ones. That will, in turn, generate increases in white-collar employment, but not much in manufacturing. So there will be a feedback relationship that is positive, as in the destination countries the prosperity factor kicks in and is accompanied by depreciation of the dollar. It has already happened, it's part of what’s going on with the euro.

Still the impacts, particularly in the service sector occupations, will be real. The pain is going to be felt there as it has been in manufacturing. No question about that. Office-intensive industries will feel the brunt of job losses due to offshoring. I think we see that in the numbers and in the trepidation that probably is responsible for my being before you here today. The impact on these industries is already evident in the data we have just seen.

There will also be significant secondary impacts on suppliers of non-labor inputs – such as you guys to some extent – to companies that offshore. We are seeing that impact already, but it will differ from market to market. It won't be the same in every metropolitan area.